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CHAPTER XVIII.

TAXATION.

TAXATION is the equivalent rendered by a people to their government for preserving peace, enforcing justice, and aiding in various other ways the production of wealth. To the extent of the services thus performed, the government is a co-worker with the rest of the community, and therefore equitably claims its share of the products of each year's industry. The aggregate task is most economically performed through a Division of Labor, whereby one class of men devote themselves exclusively to making laws and administering them, thus enabling every other class to do its special allotted work without interruption, fear, or hindrance. In the case of the Post-Office, it is easy to see that the government renders a very important service for small compensation. If the work done by the tribunals of justice is not always so highly appreciated as it deserves, the reason is, that the feeling of security which they create is so widely diffused, and so seldom interrupted, that men are not aware how much it contributes to their happiness and well-being. Those who never have suits at law are quite as much indebted to the courts as those who frequent them, and therefore a tax upon the whole community rightly furnishes the means for their support. Arbitration is better than litigation, it is true; but litigation is still better than open strife and violence. Most of the other departments of government may fairly be considered as aids of the judiciary, or means of enforcing its decisions.

Taxation in the abstract, therefore, is eminently just and expedient. The only difficulty is, how to apportion it equitably among the various classes of the people, so that each may bear its rightful portion of the burden with the utmost possible ease and acquiescence. Adam Smith's four rules for the assessment and collection' of taxes have been often quoted; but it must be confessed that they are vague and incomplete, and afford but little practical guidance for legislation. This was not his fault. As taxation needs to be applied under a great variety of circumstances, and the modes which have been contrived for applying it are numerous, and some of them complex and intricate, few rules can be laid

down which will not be found to admit many exceptions and limitations.

Adam Smith's first canon is, "The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."

Secondly, "The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought to be clear and plain to the contributor and to every other person. Where it is otherwise, every person subject to the tax is put, more or less, in the power of the tax-gatherer." A still worse evil is, that the tax-payers cannot then make those nice calculations respecting future demands upon their resources, or the causes which will affect the prices of commodities and the future state of the markets, upon which success in any commercial or manufacturing enterprise largely depends. Adam Smith declares it to be proved from the experience of all nations, "that a very considerable degree of inequality is not near so great an evil as a very small degree of uncertainty."

Thirdly, "Every tax ought to be levied at the time, and in the manner, in which it is most likely to be convenient for the contributor to pay it. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy, the goods, and as he is at liberty, too, either to buy or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes."

Fourthly, "Every tax ought to be so contrived as both to take out, and to keep out, of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state."

The first of these rules, as here stated without qualification, is far from being well founded. Taxation strictly proportioned to revenue or income would press with undue severity on the indigent

and the industrious classes; for the rich contribute out of their abundance, but the poor out of their living. Hence it is now admitted, on all hands, that the bare necessaries of life should not be taxed at all, while the articles which are properly regarded as comforts or decencies should contribute moderately, and luxuries should bear the heaviest imposts. Internal taxes are properly denominated excises, (excisa,) as they are the portion cut off from the value of commodities, or from the income of individuals, for the support of government. Now, the state has no moral right to cut off a portion of the poor man's loaf, but is fully justified in taking away some of the enjoyments of those who will yet have enough, and to spare. For this reason, a minimum of income is always declared exempt from taxation; what constitutes a minimum, must be determined by reference to the customs of the people and other circumstances of the case. Moreover, to lay equal burdens on the idle and the industrious, even if it were just, would be highly inexpedient, as it would discourage labor, and tend to dry up the resources of the state. Those who have nothing to lose have comparatively little need of protection; while wealth could not exist at all, except under the safeguard of the laws and those who administer them. In modern days, and in civilized communities, the machinery of government exists far more for the protection of property than of persons, and therefore property should bear nearly all the expense of maintaining that machinery. On the other hand, the indigent classes, by filling the army and navy, form the chief dependence of the nation in the case of war. Capitation or poll taxes are now seldom levied, and only at very low rates.

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Equality of taxation, as a maxim of politics," says Mr. Mill, means equality of sacrifice. It means apportioning the contribution of each person towards the expenses of government, so that he shall feel neither more nor less inconvenience from his share of the payment, than every other person experiences from his.” Now it is evident that a 5 per cent income tax imposes the necessity of far heavier sacrifices on a person having an income of only $1,000, than on another whose income is $10,000. In this country, it would cut off from the former most of the comforts, and, especially if he had a large family, some even of the necessaries, of life; while the latter would be restricted only in his

enjoyment of what may well be termed superfluities. The former 'would be prevented from making any provision against old age or other disability, or for the support of his family after his own death; while the latter could continue to amass capital by savings from income. Hence the proper sense to be put upon Smith's first maxim is, that "people should be taxed, not in proportion to what they have, but to what they can afford to spend." As a principle applicable to all taxes, McCulloch justly observes, that equality of contribution is an inferior consideration. The distinguishing characteristic of the best tax is, not that it is most nearly proportioned to the means of individuals, but that it is easily assessed and collected, and is at the same time most conducive, all things considered, to the public interests.'

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Adam Smith's second maxim is so obviously correct as to need little comment. It has already been illustrated, (page 69,) in treating of the causes which favor the accumulation of capital. One of the greatest evils of the feudal system was the uncertainty as to the amount of the services due from the retainer to his lord, together with the uncertainty as to the time when they would be required. Frequent changes of the Tariff of customs duties and the taxes which produce the Internal Revenue, together with the perpetual fluctuation of prices caused by the state of the currency and the alterations of the banking system, are the heaviest discouragements which industry and capital have had to encounter, in this country, since 1862. The uncertainty thus created is an additional tax, a heavy and unequal one, which diminishes, instead of increasing, the receipts of the Treasury, and enhances the cost of every enterprise, and the prices of all commodities, by the necessary insurance against risk.

The third maxim is best illustrated by the advantages which have followed the establishment of the Warehouse system. Formerly, the duties on imported goods had to be paid at the moment of their arrival, or a bond with sufficient securities had to be given for their future payment. But in the interval between the time of ordering the goods and that of selling them to advantage in this country, the altered condition of the markets, at home or abroad, may have made it advantageous to export them again. This could not be done without sacrificing the amount already paid for duties; or, if a drawback of these were allowed, there

would still be the vexation and delay of passing the merchandise again through the custom-house, with all the requisite precautions against fraud. The duties being payable at once, and not by instalments, as the goods were sold for consumption, their price was increased by the loss of interest on the capital thus advanced. Taxes on consumption, such as all customs duties are intended to be, can be most conveniently paid at the moment of sale for consumption, the importer being only the intermediate agent between the foreign producer and the domestic salesman. In order to raise funds thus to pay the duties in advance, the importer was often compelled to sell his goods at a ruinous sacrifice, immediately on their arrival. The principal ports of the country were prevented from becoming entrepôts for foreign commodities awaiting a market, and the carrying trade thereby suffered great discouragement.

All these evils are now obviated by allowing the merchandise, when imported, to be lodged in the public Warehouses, under the joint locks of the importer and the government, where they may be kept without paying the duties, till it is found convenient to enter them for consumption at home, or to send them abroad again free of any charge but that for rent. Thus the goods are not taxed till they are sold; and as the purchaser then pays the duties, the importer is not compelled to make any advance of capital. As all customs duties, like other indirect taxes, are ultimately paid by the consumer, the most convenient moment for exacting them does not arrive till the goods are ready to be sold, when the tax immediately becomes a portion of their price. Such articles as tea, coffee, sugar, and spices can be imported only at certain seasons, and in large quantities. If every facility is afforded for storing them, and the duties are exacted only little by little, as they are withdrawn for use, the government obtains from them the largest possible revenue, and imposes the least possible burden on the real tax-payers.

Smith's fourth maxim, if fully carried out, requires that the taxed person should not be deprived either of money, or of any other advantage or means of comfort or indulgence, except so far as such privation directly and proportionally increases the revenue of the state. We are now considering tax-laws so far only as they are intended to fill the national Treasury; with their inci

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